An empirical analysis of the efficiency of online auction IPO processes and traditional IPO processes

Nayantara Hensel

doi:10.1108/17439130910969729

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International Journal of Managerial Finance

ISSN: 1743-9132

Online from: 2005

Subject Area: Accounting and Finance

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An empirical analysis of the efficiency of online auction IPO processes and traditional IPO processes

Document Information:
Title:	An empirical analysis of the efficiency of online auction IPO processes and traditional IPO processes
Author(s):	Nayantara Hensel, (Graduate School of Business and Public Policy, US Naval Postgraduate School, Monterey, California, USA)
Citation:	Nayantara Hensel, (2009) "An empirical analysis of the efficiency of online auction IPO processes and traditional IPO processes", International Journal of Managerial Finance, Vol. 5 Iss: 3, pp.268 - 310
Keywords:	Auctions, Electronic commerce, Flotation of companies, Pricing, United States of America
Article type:	Research paper
DOI:	10.1108/17439130910969729 (Permanent URL)
Publisher:	Emerald Group Publishing Limited
Acknowledgements:	JEL classification – G32, G24, G12, M21 The author appreciated discussions with Professor Dale Jorgenson. The author also appreciated the comments on earlier drafts of this paper from participants at the NBEIC Conference at the Federal Reserve Bank of Dallas in 2008, at the San Francisco Chapter meeting of the National Association of Business Economists at the Bureau of Labor Statistics in 2008, at the 2007 European Financial Management Conference, at the 2007 National Association of Business Economists Annual Conference, at the 2006 Western Economics Association Conference, at the 2006 Midwest Economics Association Conference, and at the DePaul University Economics Seminar in 2006. The views and analysis in this paper represent only those of the author, not any institution with which the author is affiliated.
Abstract:	Purpose – The purpose of this paper is to examine whether the online auction mechanism in the USA is more effective at pricing initial public offerings (IPOs) than the traditional book building process. Design/methodology/approach – The analysis compares the performance of online auction IPOs with traditional IPOs issued in the same industry area and in the same year to assess the differences in first day mispricing and its persistence. The paper compares the characteristics of firms choosing the auction process relative to the traditional process. It also uses regression models to examine whether online auction IPOs had a significantly lower first day price increase than traditional IPOs. Findings – The results indicate that for 60 percent of the auction IPOs, over 40 percent of the traditional IPOs issued in that year and in that three-digit Standard Industry Classification (SIC) area had greater mispricing. The mispricing of online auction IPOs relative to traditional IPOs persist over time for 50-80 percent of online auction IPOs. Regression analyses controlling for industry effects, year effects, size of the issue, and type of traditional underwriter (low, medium, and high volume underwriters) suggest that the auction's first day price surges are not significantly lower than those of traditional underwriters. Moreover, high volume traditional underwriters have statistically significantly higher first day price surges than low volume traditional underwriters, supporting the theory that they intentionally misprice to benefit their preferred clients. Firms choosing the auction process tend to be smaller in terms of the number of shares of their IPO and their annual sales than firms choosing the traditional IPO process. There is some overlap in industry sector and age, although this varies by year. Originality/value – This paper suggests that the auction process may not be as efficient in pricing IPOs as was initially intended and that there are opportunities for further innovation and improvement.